Transcription of Finance News Network Interview with Northward Capital CEO and Sector Portfolio Manager, Darren Thompson and Portfolio Manager, John MooreClive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me to discuss its new Equity Income Fund is Northward Capital CEO and Sector Portfolio Manager, Darren Thompson and Portfolio Manager, John Moore. Welcome to you both. First up to you Darren, can you introduce the Fund?
Darren Thompson: Thanks Clive. The Northward Equity Income Fund is designed to generate consistent tax aware income throughout market cycles. And what it looks to utilise is the research base of Northward, which is now coming up to eight years of performance, generating strong performance in the long only space, married with the consistent implementation of derivative strategy to deliver that consistent income through market cycles.
Clive Tompkins: Thanks Darren. And why launch the Fund now in what is a difficult market for equities?
Darren Thompson: Well in our view, the strategy should be able to perform in all market cycles. In the current market circumstances where markets are volatile and trending down, the high volatility provides a rich environment to generate income through the use of options. And our hedging strategy also provides some downside protection. So essentially, we think that it can perform in all market cycles.
Clive Tompkins: Now to you John. The Fund will use the Northward Capital Sector Portfolio Management approach to stock selection, with an additional picker from options. What sort of return are you targeting from the use of options within the Fund?
John Moore: OK Clive. Through the use of options, we believe we can generate additional returns of five to seven per cent per annum, over and above the dividend yield.
Clive Tompkins: Good. And what will it do to reduce volatility versus the S&P/ASX 100?
John Moore: It will dampen volatility quite considerably because what we do is, we sell calls against our underlying stock positions and we sell puts. And we also then buy index puts spreads to hedge out the whole portfolio. So the combination of this whole implementation strategy of selling calls, selling puts and buying index puts spreads, dampens the volatility quite considerably. And over the last 12 months, since inception of the Fund, the volatility of the Northward Income Fund has been less than half the volatility of the underlying benchmark.
Clive Tompkins: And John will the use of options add value in all markets?
John Moore: The use of options will add value in a bear market which we’ve seen over the last 12 months, where the Northward Income Fund outperformed our benchmark by 10 per cent. You’ll underperform a quickly rallying market, but it’ll add value in a market which goes sideways or slowly grinds higher.
Clive Tompkins: Now Darren, I see the Fund’s been running a little over a year. What has it returned?
Darren Thompson: Well pleasingly given the market conditions, the Fund’s generated a return of 5.4 per cent per annum since inception. And if you include franking credits, that has grossed up to 6.8 per cent.
Clive Tompkins: Good. And how does that compare to your benchmark?
Darren Thompson: Well the ASX 100 over that time has been down 5.2 per cent, so the Fund’s outperformed by a pleasing 10.5 per cent over that period.
Clive Tompkins: OK, so how much of the return represents dividends and income from options?
Darren Thompson: So equity option income is generated at 5.4 per cent per annum. Over that period there’s been a further 4.1 per cent from dividends, and then there’s also an additional 1.2 per cent from interest on the cash holdings we have within the Fund. So altogether, the income generation through that period has been 10.8 per cent. Over longer periods, we would anticipate that being a reasonable level of income to generate consistently. But obviously over the last 12 months there’s been some capital loss, obviously less than the market and over time, we would expect some capital appreciation as well.
Clive Tompkins: Thanks. And how often will the Fund make distributions?
Darren Thompson: The Fund will distribute quarterly and it’s the intention to make consistent quarterly distributions over time.
Clive Tompkins: Back to you John. The use of derivatives and hedging has its detractors. Will the Fund be using options to leverage positions, or will strategy be restricted to covered writing?
John Moore: Clive, there will be no leveraging the Fund, the Fund will sell calls against long stock positions. And where we sell puts to target our buy level in stocks, we’ll set aside cash to cover those put positions in case we get exercise, but no leverage in the Fund.
Clive Tompkins: Good to hear John. Now as the Portfolio Manager overseeing the use of options within Northward, what’s your experience?
John Moore: Thanks Clive. Well I’ve got 25 years of financial market experience, which is involved in managing options portfolios for a range of investment clients, over a long period of time. And that’s involved multi product usage.
Clive Tompkins: And last question Darren. What’s Northward’s goal for the Fund and more importantly, for investors?
Darren Thompson: Well simply put, we want to live on our objectives to investors. And that is to deliver consistent tax aware income in the range of eight to 11 per cent per annum. Whilst also providing some marketing exposure and potential capital appreciation over time, combined with lower market volatility.
Clive Tompkins: Darren and John, good luck with the new Fund.
Darren Thompson: Thanks very much Clive.
John Moore: Thanks Clive.
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